Scalping is not automatically Halal or Haram. Instead, its permissibility depends on multiple specific components, such as the underlying assets, whether interest is involved, and whether there is excessive risk, among other factors. In this article, we’ll conduct a full analysis of the conditions required for a scalping strategy to be Shariah compliant.
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Shariah Analysis of Scalping Trading
Scalping is a form of trading that involves the shortest holding periods for a trade, sometimes as brief as seconds or minutes. It aims to take the smallest possible bites out of the market, and many scalpers execute dozens or hundreds of trades per day. There is no hard definition of scalping to differentiate it from longer intraday trades, such as those held for a couple of hours.
Let’s consider some of the key Shariah financial principles that could affect whether scalping is Halal or Haram.
- The prohibition of paying or charging interest (Riba): One of the core Shariah financial principles is that interest is Haram. Interest is usually charged on leveraged trading positions only when the trade is held past a specific time of day, which makes it an overnight trade. For example, in Forex, trades open at 5 PM Eastern Time are subject to paying or receiving interest. Given that scalping is a highly short-term strategy, it’s easy to avoid interest in scalping simply by not having open positions during this time.
- Spot versus futures: All Islamic scholars consider spot transactions to be Halal, whereas there is no consensus among them on derivatives such as futures contracts. From the perspective of scalping, it’s more permissible to trade spot instruments, such as spot Forex.
- Is the underlying asset Halal? Given that pork, alcohol, interest, and gambling are Haram, trading assets that engage in those areas (e.g., pork-based businesses or trade bonds that pay interest) would also be considered Haram.
- Short-selling: All Islamic scholars consider long trades to be Halal, whereas many scholars consider short-selling to be Haram. (There are differences of opinion here, because some scholars argue that short-selling an instrument on exchanges can be Halal, since it can be readily repurchased through the exchange.) However, because Forex trades in pairs, going long or short a Forex pair is Halal because it’s an exchange of two currencies.
- Is there excessive risk (Gharar)? Excessive risk should be avoided, especially when it involves excessive leverage or contract terms that are ambiguous. Most scalping occurs with standardized terms on exchanges that are clear and precise, helping to eliminate undefined risks.
Worries & Risks Regarding Scalping Trading in Islam
One of the key concerns about scalping is that its rapid pace does not add value to the markets or the economy; in other words, it lacks an underlying commercial purpose. Therefore, some observers view scalping as akin to fast bets or gambling, which would render it Haram. However, others argue that even with scalping, underlying economic forces still control price changes, and short-term traders add value through price discovery and adding liquidity to the markets, making scalping Halal.
Another concern is that scalping relies on being able to take both long and short positions. Aside from Forex pairs, many Shariah scholars consider going short on assets as intrinsically Haram.
The short holding periods and sheer number of trades required to make scalping profitable lead some scholars to believe that it suffers from Gharar or excessive risk. Trading costs add up (spreads and commissions) for tiny profits on each trade, making it easier to enter a downward spiral of losses.
How Can a Scalping Trading Strategy Become Halal?
There are several steps to ensure a scalping strategy is halal:
- Do not hold positions that would result in rollover/interest charges.
- Trade spot contracts instead of futures.
- Do not short-sell assets such as equities or commodities. (On the other hand, most experts consider it Halal to go long or short Forex pairs.)
- “Halal Scalping Trading Strategies” that help control risk through stop-loss and money management techniques help avoid Gharar or excessive risk.
How to Verify Your Scalping Broker is Shariah Compliant
Rather than trying to determine for yourself whether the broker is Shariah-compliant, many brokers worldwide today offer Shariah-compliant accounts, ensuring their services meet core Islamic financial principles. One of the key measures that brokers take with Shariah accounts is not to charge interest on leveraged positions.
Some brokers offering Shariah-compliant accounts have Shariah advisors who provide oversight or approvals of broker services to confirm they are compliant.
My Take
Scalping can be Halal if the underlying instruments are Halal (e.g., spot contracts rather than futures, or equities whose underlying businesses do not engage in Haram activities such as alcohol production). Shariah-compliant accounts that do not charge interest on leveraged positions also help ensure compliance. Scalping can be excessively risky, something which Islam deters. However, a strategy that controls risk through stop-losses and favourable reward/risk ratios can ensure a more Shariah-compliant model.
